New Form 1099-DA: IRS Releases Draft for Digital Assets Form

The IRS has finally revealed the new draft Form 1099-DA, which is the very first type of form specifically created for digital assets, or cryptocurrency. This release has been anticipated since the IRS issued proposed regulations in August 2023 that would require brokers to report transactions of digital assets.

Form 1099-DA is set to come into effect starting in tax year 2025. This means that brokers would be required to furnish the detailed form to taxpayers regarding their digital assets, such as sales and exchanges. 

This form is meant to simplify the tax reporting process for crypto transactions, so it’s important that both brokers and taxpayers are aware of what Form 1099-DA is, how it works, and what information is included. Here’s what you should know about the new Form 1099-DA.

Why was IRS Form 1099-DA created? 

Due to the increasing popularity of digital assets and currency, it’s likely that many investors have failed to meet their tax reporting obligations due to ambiguous tax rules regarding cryptocurrency. 

This has created a need for the US Government to create clearer tax reporting guidelines. This led to a section in the Investment and Jobs Act (IIJA) of 2021 to be signed into law. This section mandates that crypto exchanges and platforms report on digital asset transactions to the IRS. The creation of Form 1099-DA is to improve tax compliance among cryptocurrency users and make reporting on digital assets much easier. 

What is IRS Form 1099-DA, Digital Assets? 

IRS Form 1099-DA is a new tax form created for brokers to report information on digital asset transactions. It is set to be implemented starting for tax year 2025, with taxpayers set to receive their first Form 1099-DA in 2026. This form will help make cryptocurrency reporting more transparent and straightforward. 

Who needs to submit IRS Form 1099-DA?

Digital asset brokers must file Form 1099-DA with the IRS and provide copies to taxpayers. One controversial aspect of the proposed regulations has been defining who qualifies as a broker in regards to digital asset transactions. The IRS’s proposed regulations provide detailed criteria, focusing on entities that know the identities of parties involved in digital asset transactions.

Currently, the draft version of Form 1099-DA asks brokers to indicate if they fall into one of the following categories:

• Kiosk operator (e.g., Bitcoin ATMs)
• Digital asset payment processor (includes both centralized and decentralized exchanges)
• Hosted wallet provider
• Unhosted wallet provider
• Other

The inclusion of unhosted wallets in the broker definition has been controversial, with many in the industry arguing it is overly broad. However, a recent ruling in Coinbase’s case against the SEC suggests that both hosted and unhosted wallets might not be subject to Form 1099-DA reporting. This issue remains unresolved, and some categories may be removed from the final form.

Notably, the IRS does not consider the following as brokers:

• Miners, node operators, or others who maintain the blockchain
• Software developers facilitating digital asset transactions indirectly
• Smart contract developers who do not maintain or update their contracts

This clarification addresses concerns that the broad language of the Infrastructure Act would unfairly categorize these parties as brokers.

What are the implications of the draft release? 

The draft Form 1099-DA, based on proposed regulations from August 2023, does not yet include public feedback. There is still an opportunity for the IRS to refine the policy, meaning the final form might differ from the current draft.

What information is required on Form 1099-DA?

The draft of Form 1099-DA shows details about the sale or disposition of digital assets, including cryptocurrencies, NFTs, and stablecoins. This is similar to what is reported for stocks on Form 1099-B:

• Acquisition date of the digital asset
• The price of the purchase
• Sale or disposition date
• Proceeds from the sale or swap

Cost Basis

Brokers report the cost basis in Box 1g, listing each transaction and the total. However, this may be blank in cases where the asset was transferred from another broker, acquired before January 1, 2023, or sold before January 1, 2026. Taxpayers will need to calculate their own cost basis if this occurs.

Proceeds

Box 1f will detail proceeds, both itemized and total. It’s important to understand that reported proceeds could suggest higher capital gains tax liabilities than reality.

Asset Codes

Box 1a will include a code for each digital asset, with “999999” used for assets not otherwise coded. This will likely apply to many altcoin transactions.

Date and Time Reporting

Using Coordinated Universal Time (UTC), Boxes 1d and 1e will report when the asset was acquired and disposed of. This aligns with practices in the crypto industry but may be left blank under certain circumstances.

Potential issues

While Form 1099-DA aims to simplify crypto tax reporting, it may still present challenges for taxpayers and brokers. For example:

• Previously Unreported Crypto: The IRS might discover unreported digital asset activity once brokers begin using Form 1099-DA. Those in this situation should seek legal advice immediately to avoid potential audits or criminal investigations.
• Transferring Crypto Between Brokers: Accurate cost basis information requires brokers to share data when assets are transferred, a practice not yet standard in the crypto world. This could lead to inflated capital gains reports.
• Self-Transfers: Transfers between a taxpayer’s own accounts are not taxable, but brokers might misclassify these, leading to discrepancies.

How to prepare

Digital Asset Brokers

If you might be considered a broker, consult with a crypto tax attorney to determine your filing obligations and plan for compliance.

Taxpayers

If you’ve previously misreported or omitted crypto transactions, now is the time to rectify this. Proactive measures can prevent severe penalties. Use crypto tax software to calculate capital gains and consider professional help to ensure accurate future reporting.

Deadlines & Penalties

The IRS has yet to release the official form or instructions, so we don’t yet know what the associated deadlines and penalty amounts will be.

Conclusion

The introduction of the new Form 1099-DA marks a significant step towards clarifying tax reporting for digital assets. By mandating detailed reporting from brokers, the IRS aims to streamline the tax process and improve compliance among digital asset users. 

Like other forms 1099, paper filing this form will likely require a Form 1096 transmittal form. You can learn more about the transmittal form for Forms 1099 by downloading our Form 1096 PDF Guide.We also have many other resources to help you stay up-to-date on the latest tax news. Check out our Essential Guides to master all of your filing requirements, and always review deadlines to ensure that you’re one step ahead!

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